IMF Survey: Gulf Countries Explore Options for Deepening Domestic Debt Markets
September 21, 2012
- Domestic debt issuance is relatively limited in Gulf Cooperation Council states
- Issuing government debt has significant benefits, even for fiscal surplus countries
- Access to long-term financing is key for diversification in Gulf countries
Participants at a capital markets conference in Qatar focused on the benefits, policy trade-offs, and practical approaches to developing local currency domestic debt markets to tap an alternative source of funding.
QATAR CAPITAL MARKETS CONFERENCE
In the member countries of the Gulf Cooperation Council (GCC), domestic debt markets are still at an early stage of development compared with other regions. But policymakers across the GCC—and the Middle East region more broadly—are placing a strong emphasis on developing these markets based on a broader vision for an increasing role for the private sector in driving economic growth and diversification. In addition, planned social and physical infrastructure projects require significant long-term funding. Greater access to capital, in turn, requires a more strategic approach to capital market development.
In an effort to strengthen its capital market infrastructure, Qatar will be establishing a domestic rating agency within a year, the Qatari central bank governor, Abdullah Al-Thani, announced at the conference, held on September 18–19.
The conference, organized by the Qatar Central Bank in collaboration with the IMF and the Qatar General Secretariat of Development Planning, brought together representatives of central banks, governments, regulators, the academic community, and the private sector as well as international financial institutions.
Benefits of financial deepening
In a number of emerging market economies, local currency domestic debt markets are becoming increasingly important as an alternative source of funding. These markets are playing a growing role in providing finance to governments and corporations, and in reducing their dependence on the banking sector.
Among others, “domestic debt markets create a conducive environment for encouraging investments,” Governor Al-Thani stated. In this context, “GCC governments need to develop government securities to set benchmarks for the private sector” according to the Governor of the Central Bank of the United Arab Emirates, Sultan Al-Suwaidi. Central Bank of Oman Executive President Hamood Zadjali added that “GCC countries cannot continue to finance high-cost development projects through budgets, given that revenues are dependent on volatile oil prices.”
Across the GCC—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—the financial sector is generally dominated by the banking sector, which is highly concentrated, with a few domestic players involved in the market. In addition, domestic debt markets have not been considered essential in a region with an abundance of liquidity and capital from oil and gas revenues and relatively easy access to international capital markets. As such, overall GCC domestic government and corporate debt issuance remains relatively limited.
Nevertheless, for the GCC, developing liquid and deep domestic debt markets can bring important benefits, including diversifying financing risks, supporting further development of funded pension schemes, and enhancing corporate governance as debt issuance will demand more financial disclosure and transparency. In addition to allowing governments to finance deficits at lower costs, a well functioning government securities market can also
• establish the benchmark yield curve for private sector issuers;
• create new financial products that improve financial efficiency;
• make monetary policy operations and the monetary transmission mechanism more efficient, and facilitate liquidity management; and
• diversify risks in the financial system.
In particular, as GCC countries advance their diversification agenda, the availability of long-term financing will become even more important, particularly to finance mega-infrastructure projects.
Delegates at the conference emphasized that issuing government debt has additional important benefits, even for fiscal surplus countries, beyond establishing a benchmark yield curve for the private sector. An established government debt market helps lower the cost of re-entering the market in the event of a major fiscal shock; provide collateral, for example, for real-time gross settlement systems; and serve as underlying instruments for financial derivatives.
What can policymakers do?
While well managed financial deepening can create greater resilience to cope with shocks, enhance policy effectiveness, and support strong and durable growth, policymakers face a range of important questions about how exactly to do this. The state sets the policy, legal, and regulatory frameworks and plays a major role in developing the necessary market infrastructure.
Coordination among the central bank, government, ministry of finance, and the regulator is key for creating an enabling environment for market development. Some GCC countries are issuing government debt at modest levels, but a more concerted effort is needed to take the process forward.
At a practical level, domestic debt market development will require attention to a broad range of enabling areas including public debt management, a diverse investor base, corporate governance, and market transparency and integrity, as well as the technicalities of developing products and market platforms.
To help countries move forward on these fronts, the IMF is engaging in a number of technical assistance initiatives in partnership with other international and regional organizations aimed at providing support for building sound financial infrastructure, strengthening financial stability, and enhancing access to finance across the region.
“Our hope is that the discussions over the past two days will be helpful to GCC countries as they consider the sequencing of action in introducing, promoting, and regulating new kinds of financial activities and instruments,” said Masood Ahmed, Director of the IMF’s Middle East and Central Asia Department. “The ultimate objective is to develop well functioning local debt markets in the region to enhance monetary policy transmission, access to finance, spur private-sector activity, and foster economic growth and stability within the region,” Ahmed added.